Foreign investors remain dubious about SOE reforms in Vietnam

Since 2010, Vietnam’s government has set more aggressive targets for equitization and divestment from state-owned enterprises (SOEs). And even without WTO commitments and free trade agreements mandating a more open economy, the argument in favor of this approach is compelling.

Virtually every economy in the world will have some SOEs, and economists seem to agree they can play a positive role in public service sectors (such as public transportation, health care, and education) and industries with a “natural monopoly” (railroads and tap water, for example). In most cases, however, the costs associated with SOEs, namely inefficiency, “rent seeking” and potential for corruption, will tend to outweigh the benefits of steady employment for a large number of workers and dividends to the state budget.

Aside from this general economic argument favoring a larger role for the private sector, the state’s plans for accelerated SOE divestment makes sense for three additional reasons.

First, the ongoing boom in domestic and global stock markets ensures the state can sell its shares at a better price compared with previous years.

Second, it would boost the market cap and liquidity of the stock market. This could lead to the market’s graduation from “frontier market” status and its inclusion on much larger “emerging market” indexes. Besides being a symbolic milestone in Vietnam’s integration into the global economy, this would have the tangible effect of creating a more balanced financial system, with a larger role for capital markets and reduced dependence on bank lending.

Third, it could help finance critical infrastructure projects without placing too much strain on the state budget. The government has already indicated that the VND250 trillion it sought to mobilize from SOE divestments between 2016 and 2020 would be directed to such projects. Indeed, there may be few alternatives, as access to concessionary lending from the World Bank and ODA partners are declining, and public debt is already close to the legal limit of 65% of GDP.

Despite the compelling argument supporting more equitization and divestment from SOEs, foreign investors tend to view the government’s plans with considerable skepticism. Last month, the Japanese business journal Nikkei Review quoted several anonymous foreign investors, who used the words “unreasonable,” “disappointing” and “fake” to describe the equitization process.

Some might ask why it is important to consider the views of foreigners. But this question has a simple answer. The government has expressed intentions to divest from huge holding in companies that are large by Vietnamese standards. If we were to look at entities with a genuine interest in these assets and also a financial capacity to buy them, a substantial share of them would be of foreign investors.

Some analysts say the biggest problem has been the asking price for state-owned shares. For example, when the government previously offered up a 9% stake in Vinamilk, the nation's top dairy products supplier, it set a minimum bid at144,000 dong ($6.34) per share. This was 7.2% higher than the stock price at the time, and as it turned out, Singapore-based beverage company Fraser and Neave was the only bidder. It bought a 5.4% stake, and the government found no buyer for the remaining shares.

Although share pricing is important, investment restrictions and the small stakes offered in IPOs may be of greater concern. Pham Duc Trung of the Central Institute for Economic Management, who was recently interviewed by TheLeader, echoed some of these concerns by noting that around 4,500 SOEs had been converted into joint stock companies, but only 10% of the shares in those firms had been sold to private investors.

The reality is that global capital markets are dominated by large institutional investors (pension funds and mutual fund providers for example) whose assets under management are often many times greater than the market capitalization of the entire Vietnamese stock index. Vietnam firms, which are small by international standards, are going to remain off their radar of big funds until there are fewer restrictions and more “room” for them to invest.

Meanwhile, some other private equity firms and boutique asset managers are willing to make smaller investments, but they typically want to buy larger stakes (perhaps around 20%) and are less likely to be interested in firms in which a government entity retains a controlling or veto-holding stake.

Foreign investors were disappointed (but probably not so surprised) by the government’s recently unveiled plans to reduce its holdings in Vinamilk and Sabeco to around 36%. This figure is enough to retain veto rights; despite initial indications a full divestment was forthcoming.

It is hard to blame investors for asking: if the state is unwilling completely part ways with companies in relatively mundane sectors such as dairy and breweries, how can it be expected to divest from its holdings in more strategic sectors, such as telecom and transportation?

Despite the grumbling among some investors, Vietnam’s strong economic growth prospects ensure that many of them will remain interested in the nation’s equitization process. But the substance of SOE reform will lag behind the symbolism until the government and investors come into greater alignment on these issues.

*The author is Business Development Manager at Global Integration Business Consultants in Ho Chi Minh City